Thoughts from Mulesoft and AppDynamics IPO Filings

I finally had a chance to take a quick read of the respective S1 filings for AppDynamics and Mulesoft. While the growth for each company is quite amazing, two thoughts jumped out at me.

As we move to a cloud-only world with instant-on capabilities and low friction in onboarding customers, why does professional services revenue keep increasing year over year for these enterprise cloud businesses. Secondly, as the world continues to move to the cloud, why does on-prem software exist any more?

Looking at both S1 filings, it’s clear that AppDynamics and Mulesoft have caught on to what Salesforce already knows – if you want to be a massive business you also need to sell professional services. As these tech companies get larger and larger, their target customer also increases in size as these vendors look to move from 6 to 7 figure deals. In order to support continued ARR growth upstream, some of the best companies successfully use professional services as a weapon and make implementation, support and training part of the sale. See Jeff Leventhal’s post (boldstart venture partner and Workrails cofounder/CEO) on why services continue to matter for cloud vendors.

Same goes for why on-prem. In both S1s, we can see Mulesoft and AppDynamics discussing the need for multiple delivery models as many larger customers have regulatory and compliance needs, esp. in banking, insurance, and health care. On-premise and hybrid cloud deployments are not going away despite the continued adoption of the cloud. There is a whole world of what being enterprise ready from a product perspective looks like, and how SaaS companies can use new technology like Docker to have the best of both worlds, SaaS and on-prem without multiple code bases. If interested, take a look at EnterpriseReady.io curated by Replicated (full disclosure: boldstart is an investor).

Professional services drives subscription revenue

From a customer and revenue perspective, Mulesoft has continued to move upstream as their average selling price was $82k in 2014, $105k in 2015, and $143k in 2016. For AppDynamics, the best I could find was total number of customers at end of October 2016 of 1,975 with revenue of $158mm for average selling price of $80k.

From both filings, we can see that professional services revenue became a bigger part of the revenue pie. And in both cases, it’s pretty clear that professional services exist to drive the recurring subscription growth. In other words, neither group is making tons of gross margin and in fact one is almost breakeven while AppDynamics is losing money.

Here is a deeper dive into the importance of professional services revenue at Mulesoft and AppDynamics:

Increasingly, our platform has been deployed in large scale, complex technology environments, and we believe our future success will depend on our ability to increase sales of our platform for use in such deployments. We must often assist our customers in achieving successful implementations of our platform, which we do through our professional services organization. The time required to implement our platform can range from three months for smaller deployments to six months or more for larger deployments.

from AppDynamics S1 Filing:

The AppDynamics platform is much easier to get up and running, and thus, professional services is a much lower percentage of overall revenue. However, since 2014 the percentage increased from 4.1% to 7.8%, and we can expect this number to keep going up in the future.

Our ability to sell our applications is dependent upon the quality of our professional services and customer support services, and our failure to offer high-quality professional services and customer support services could have an adverse effect on our business and operating results.

Once our applications are deployed, our customers utilize our professional services and customer support services and those of our partners to resolve any issues relating to the implementation or operation of our applications. Our sales process is highly dependent on the quality of our applications, the reputation of our business and positive recommendations from our existing customers. If a customer is not satisfied with the quality of work performed by us or our partners or with the interoperability of our applications with their IT infrastructure, then we may incur additional costs to address the situation and our customer’s dissatisfaction which could damage our ability to sell additional applications and adversely affect our revenue and operating results.

Flexibility of delivery model is huge for large customers – cloud, on-prem, hybrid

As you move upstream in your customer base to larger enterprises, the harder it is to just sell cloud -only as a delivery model as these larger customers demand on-prem or hybrid versions to meet regulatory and compliance needs. Here is a deeper dive on why on-prem or hybrid:

“Our platform is deployed in a wide variety of technology environments, both on-premises and in the cloud. Increasingly, our platform has been deployed in large scale, complex technology environments, and we believe our future success will depend on our ability to increase sales of our platform for use in such deployments.

We offer a full range of deployment options across most of our applications, including public cloud providers, such as Amazon Web Services (AWS) and Microsoft Azure, on-premises and hybrid approaches. We deliver the same core platform irrespective of the deployment option chosen, which helps ensure that our applications align with the needs of our customers.

What does this mean for startups?

If you are a startup selling to large enterprises, it’s an expensive endeavor. Once you get the first few pilots implemented and convert to paying customers, I would consider bringing someone onboard who can get customers up and running successfully without taking away from executive or developer resources. Professional services is not a dirty word, especially if you remember that it’s there to enhance the growth of your recurring subscription revenue. And while the cloud is continuing to dominate in growth, there are still many huge enterprises in regulated industries that require some form of on-prem software. If you want a shot at those customers, then I suggest early on you consider how to architect your systems in a way to make it easier to do down the line. Examples could include not locking yourself into a full proprietary AWS stack like Dynamodb.